Federal officials recently approved “reference pricing,” a new cost-control mechanism that allows insurers to put a dollar limit on the amount that health plans pay for some expensive medical procedures, such as knee and hip replacements. The decision affects most employer-based plans as well as plans purchased through the Affordable Care Act’s exchanges. Plans must use a “reasonable method” to ensure “adequate access to quality providers.”

The following illustrates how reference pricing works:

Assume that a health plan sets a hard cap of $30,000 — known as the “reference price” — on what it will pay for hospital charges associated with a knee replacement surgery. The plan offers the insured a choice of hospitals within its provider network. If the insured chooses a hospital that charges $40,000 for the knee replacement, the insured could owe $10,000 to the hospital, in addition to the insured’s usual cost-sharing for the $30,000 covered by the plan.

The extra $10,000 is treated as an out-of-network expense and does not count toward the plan’s annual limit on out-of-pocket costs. This is important because, under the Affordable Care Act, most plans have to pick up the entire cost of care after the patient reaches the annual out-of-pocket limit (currently $6,350 for single coverage and $12,700 for a family plan). Prior to the federal officials’ ruling, it was unclear whether reference pricing violated this provision.

CalPERS, the California agency that manages health and retirement benefits for public employees, began using reference pricing in 2011 with regard to knee and hip replacements by steering patients to hospitals that were approved for quality and charged $30,000 or less. CalPERS’ health benefits director said the program has been a success and that patients are able to choose from about fifty hospitals.

However, reference pricing may be suitable only for a specific subset of medical care: frequently-performed procedures where the prices charged vary widely but the quality of results do not. This could include MRIs and other imaging tests, cataract surgeries, and colonoscopies.

More than a million California residents whose health plans were cancelled under the Affordable Care Act, a.k.a. Obamacare, will not be able to keep their existing coverage, despite President Obama’s directive that insurers keep such plans available for another year. The decision about whether to implement the president’s administrative “fix” rested with Covered California, the state’s new insurance exchange. The exchange’s board announced today that it would not allow insurers to revive plans that fell short of the ACA’s coverage mandates. Instead, California’s exchange will stay the course and continue to enroll residents into Obamacare.

Covered California made the best decision for consumers by supporting the success of our new health insurance marketplace,” said Patrick Johnston, President and CEO of the California Association of Health Plans. “Today’s decision comes with a renewed effort to ease the transition process for consumers in the form of a five-step action plan focusing on extending deadlines and increasing enrollment assistance.”

The decision will undoubtedly disappoint California residents who liked their previous coverage and had hoped they could keep their nonconforming plans for another year. The announcement also drew the consternation of state Insurance Commissioner Dave Jones, who previously expressed support for President Obama’s directive.

Covered California rejected what President Obama and I asked for – that individual policyholders be allowed to keep their existing health insurance through all of 2014. Covered California’s decision denies Californians the same opportunity health insurers are giving to its small business customers who are being allowed to renew current policies throughout 2014.”

The board’s decision, however, does not come as a surprise. Allowing nonconforming policies to continue for another year poses a risk to Obamacare’s financial viability as the move could prevent young, healthy individuals from participating in the new exchanges. A risk pool disproportionately made up of previously hard-to-insure participants could cause premiums to soar. We will watch the developments and keep you informed.

On Tuesday, July 2, 2013, the U.S. Department of Treasury announced that it will provide an additional year before the mandatory employer and insurer reporting requirements of the Affordable Care Act (ACA) begin.

In a blog posting, Mark J. Mazur, Assistant Secretary for Tax Policy at the U.S. Department of Treasury, stated that the Administration has been engaging in a dialogue with businesses about the new reporting requirements under the ACA.

According to Mr. Mazur, "[w]e have heard concerns about the complexity of the requirements and the need for more time to implement them effectively."

The additional year will meet two goals, according to Mazur:

First, it will allow us to consider ways to simplify the new reporting requirements consistent with the law. Second it will provide time to adapt health coverage and reporting systems while employers are moving toward making health coverage affordable and accessible for their employees."

In their article, LeBlanc and Ferrall note that the court focused on two key provisions of the Patient Protection and Affordable Care Act: the individual mandate, requiring most Americans to have insurance coverage; and the Medicaid expansion requirement which, had the court not struck it down, would have required states to meet certain federal requirements to receive funding. The article provided legal context and background on the Affordable Care Act and discussed how the court came to the conclusion that the law was “mostly constitutional.”

“In doing so, the court emphasized that its role was not to address the soundness of federal policy, but rather to interpret the law and enforce limits on federal power,” LeBlanc and Ferrall wrote.

The first bill, Senate Bill 951 (Hernandez, D-West Covina), would require individual and small group health care service plans and insurance policies to cover essential health benefits beginning in 2014. Under the ACA, essential health benefits must include the following ten categories of items and services:

Rehabilitative and “habilitative” services and devices (to date, there is no guidance as to what the “habilitative” umbrella will include)

Laboratory services

Preventive and wellness services and chronic disease management

Pediatric services, including oral and vision care

SB 951 designates the Kaiser Small Group HMO as the benchmark standard for essential health benefits coverage in California.

The second piece of legislation, Senate Bill 961 (Hernandez, D-West Covina), prohibits health care service plans and insurers from denying coverage to individuals based on preexisting conditions. It requires guaranteed issue of individual health service plans and insurance policies. The bill only allows health plans and insurers to use age, geographic region, and family size in establishing individual coverage rates.

The Minimum Essential Coverage Provision – referred to as the “individual mandate” -- requires that most United States citizens purchase health insurance by 2014 or face a penalty included in the individual’s tax return.

Because he found that this provision was not severable from the remainder of the PPACA, Judge Vinson declared the entire PPACA void.

The lawsuit challenging the constitutionality of the PPACA was filed by the Attorneys General and/or the Governors of Alabama, Alaska, Arizona, Colorado, Florida, Georgia, Idaho, Indian, Iowa, Kansas, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, North Dakota, Ohio, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming, along with two private citizens and the National Federal of Independent Business (collectively the “Plaintiffs”).

Judge Vinson agreed, explaining in a 78-page opinion, that the provision attempted to impermissibly regulate “economic inactivity,” as the Commerce Clause only permits Congress to regulate “activity.” A copy of Judge Vinson’s opinion can be found here.

It is widely anticipated that the ultimate resolution of the constitutionality of the PPACA will be made by the United States Supreme Court.

The lawsuit challenging the constitutionality of the Minimum Essential Coverage Provision in the PPACA was filed by the Commonwealth of Virginia. The state contended, among other items, that the Minimum Essential Coverage Provision exceeded the power of Congress under both the Commerce Clause and General Welfare Clause of the United States Constitution. Judge Hudson agreed, explaining in a 42-page opinion, that the provision “exceeds the constitutional boundaries of congressional power.”

Reports indicate that President Obama’s administration intends to appeal the decision. It is widely anticipated that the ultimate resolution of the constitutionality of the Minimum Essential Coverage Provision will be made by the United States Supreme Court.

While Republicans in Congress vow to repeal such enactment, key aspects of the PPACA went into effect on September 23, 2010, which marks the six-month anniversary of the legislation.

Although the following list is not exhaustive, here are some of the more notable changes in the health care reform law (effective September 23, 2010) that will apply to individual and group health plans:

Coverage Changes

No Lifetime or Annual Limits on Essential Benefits:

Health plans may not contain lifetime limits on the amount of benefits that will be provided for essential benefits. No regulations have yet been issued regarding the definition of “essential benefits, which in general include, but are not limited to, ambulatory patient services, emergency services, hospitalization, maternity and newborn care, prescription drugs, laboratory services, preventive and wellness services, and chronic disease management. As for annual limits, for plan years beginning before January 1, 2014, the Department of Health and Human Services’ (“HHS”) interim regulations adopt a three-year phase-in approach of removing annual limits on essential health benefits. For more information, click here.

Anti-Rescission Rules:

Health plans may not rescind, i.e., retroactively cancel coverage, except in cases of fraud or intentional misrepresentations of material fact. These rules do not apply to prospective cancellations or any cancellation due to failure to timely pay premiums.

Mandatory Preventative Health Care Services:

Health plans must provide benefits without cost sharing (i.e., no co-payments, deductibles or co-insurance) for certain preventative services, including, but not limited to, immunizations recommended by the CDC, as well as preventative care and screening for infants, children and adolescents and for women as recommended by the Health Resources and Services Administration. Grandfathered health plans are exempt. (A grandfathered health plan is a group health plan that was created – or an individual health insurance policy that was purchased – on or before March 23, 2010, and a health plan must disclose in its plan materials whether it considers itself to be a grandfathered plan.)

Extension of Adult Dependents Coverage:

For health plans that elect to provide dependent coverage, such coverage must be extended to adult children up to age 26.

No Pre-existing Condition Exclusions for Children:

Health plans may not impose any preexisting condition exclusions for children 19 and under. (Grandfathered plans are exempt.).

Patient Protection Changes

Right to Choose Primary Care Provider (“PCP”):

For health plans that require designation of a PCP, the patient must be allowed to designate any participating PCP accepting new patients. For children, any participating physician specializing in pediatrics can be designated as the child’s PCP and, for women, any participating OB-GYN can be designated as a PCP.

Coverage for Emergency Services:

For health plans that provide coverage for emergency services, such plans must do so without requiring prior authorization and regardless of whether the provider of emergency services is a participating provider. Emergency services provided by a non-participating provider must also be provided at the same level of cost-sharing as would apply to a participating provider.

Appeals Process:

Group plans must provide for an internal appeals process that complies with the U.S. Department of Labor regulations and individual plans must provide an internal appeals process that comports with the standards established by the Secretary of Health and Human Services. Both group and individual plans must also provide for an external appeals process that complies with applicable law or at a minimum with the NAIC Uniform External Review Model Act.

Additional health care reform changes will continue to take effect in 2010 and as late as 2018. More information about the PPACA can be found on the National Association of Insurance Commissioners (NAIC) website here.

For additional information on ERISA plans and the PPACA, the U.S. Department of Labor has posted information on its website here.

For additional information on the PPACA and individual policies and nonfederal governmental plans, the HHS has posted information on its websites here and here.